Granting bank credit are defined as the factors that lenders use to determine whether a borrower will be approved for a particular loan or credit, and although individual lenders may differ in the specific criteria being considered, most of them use a set of basic convergent criteria. standards that give banks credit to them?
The concept of criteria for granting bank credit
granting bank credit – They are factors that banks and financial companies use when evaluating a new credit application by a borrower. The primary objective of these criteria is to estimate the creditworthiness of the borrower and to favor applicants with a history of regular and complete payments and relatively few credit inquiries. Most credit models prefer applicants who have remained within limits. Total creditworthiness and those with a long and long history of credit accounts
Credit rating factors for borrowers
Most of the lending banks and financial institutions use five basic points to assess and measure the creditworthiness of borrowers, as follows:
- Having determined the due date of the borrower in terms of paying his obligations, a rate of 35% is given.
- The average life of the borrower’s current credit accounts is given as 15%.
- The borrower’s credit mix accounts are given 10%.
- The number of new credit applications for the borrower, given the rate of 10%
The bank or credit provider collects these factors and then enters them into a special form through which the credit score that weights them is recorded according to importance and aims to obtain a result that shows a comprehensive credit score for the borrower, and based on that result, a decision is made to approve the credit request or not. granting bank credit
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5Cs Credit Analysis Model
The 5Cs credit model is a system of elements that lenders use to measure the creditworthiness of borrowers. This system consists of five characteristics of the borrower and the terms of the loan in order to estimate the chance of default, determine whether the applicant qualifies for credit, and thus attempt to estimate the risk of loss. For the lender, the five Cs consist of the following elements:
Personal
Personality is the most comprehensive aspect of the creditworthiness assessment process, and in general, it expresses the extent to which a person is entitled to obtain credit through the characteristics of the customer that will affect his repayment of the loan. If the lender is confident that the borrower will pay his debt obligations in the required time, then the borrower is considered creditworthy, and after the lender has reviewed the borrower’s record in the credit department, he will be able to achieve a comprehensive vision of the borrower’s personality in terms of paying the previous obligations on time or defaulting on them. granting bank credit
Eligibility
Eligibility or ability The ability of the borrower to repay the loan is a necessary factor in determining the loan’s exposure to risk. The borrower’s ability and eligibility can be determined by the amount of his income, employment history, and current job stability. In addition to comparing income to recurring debt and calculating the debt-to-income ratio, the lower the debt-to-income ratio, The chance of qualifying for the loan was better, and this percentage varies from one borrower to another, each according to his income and debts.
Warranties
granting bank credit, Collateral can assist the borrower in obtaining the loan. It gives the lender a security in case the borrower defaults on the loan, so that the lender can get something back through the guarantee, and often the guarantee is the goal for which the borrower applies for the loan. For example, car loans are backed by cars and home mortgages, which is why collateral-backed loans are sometimes referred to as being less risky and usually offered at lower interest rates compared to other unsecured forms of financing.
Capital
Lenders take capital into account as it contributes significantly to reducing the chance of default. As the capital represents the total assets under the borrower’s name from his investments, savings, and assets such as land, and loans are repaid primarily through income, the capital is an additional guarantee in case of unforeseen circumstances.
The conditions
The terms refer to the details of any credit transaction that affect the lender’s willingness to finance the borrower, such as the principal amount or the interest rate. industry-specific terms, all of which indicate the level of risk associated with a particular investment.
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